CUBE SYSTEM INC. Q2 FY2026 earnings call

Overall Strategic Direction

• The period is the second year of the 2nd Medium-Term Management Plan (VISION2026), with goals to build a growth foundation and transform to a planning-oriented business model to achieve breakthrough growth.
• The company follows a three-segment interconnected growth strategy: knowledge from Sier-oriented business is leveraged to develop proprietary services for service-oriented business, and customer relationships/know-how from service-oriented business are used to expand Sier-oriented and prime-oriented business. Mutual cross-segment value sharing drives overall growth.

Key Operational Updates

• Product and R&D Investment:
  • Announced AI-powered human capital management service H・CUBiC in October 2024, currently conducting pilot testing at a construction industry client.
  • Developing an AI-powered automatic ordering system for retail, scheduled for commercial launch in spring 2026.
• Quality Improvement:
  • Has revised project review processes and sorted out low-profit projects to eliminate unprofitable work. Unprofitable projects have declined but have not been fully eliminated, so the company will continue improving project risk assessment capabilities.
• Human Capital:
  • Strengthened both new graduate and mid-career hiring, growing total group headcount to 963 as of September 2025. Persistently invest in employee skill upgrading to keep up with accelerating IT innovation, but faces a shortage of mid-level leader talent amid high industry labor turnover. Will continue focusing on employee retention initiatives.
  • Revenue growth has not kept pace with headcount growth, so per-employee sales and operating profit have declined; the company will prioritize improving per-employee performance metrics going forward.
• Production Capacity Expansion:
  • Opened the new Shinagawa Innovation Hub development center in September 2025 in Tokyo, with 400 seats dedicated to expanded production capacity and dedicated collaboration space to drive internal idea sharing and development of proprietary IP and solutions.
  • Currently testing AI for internal system use, with plans to expand AI application to code generation and testing for client projects in the future to drive production innovation.
• Sustainability and Stakeholder Focus:
  • Aims to be a sustainably growing company that contributes to society, focusing on both financial and non-financial value creation. Prioritizes promoting diversity, reducing overwork through work style reform, and improving employee engagement.

1. Sier向け事業: Revenue decreased slightly year-over-year, as smaller non-key client orders shrank even though inquiries from key partners NRI and Fujitsu remained solid. The segment saw improved profitability after exiting low-margin projects, and a 1 billion yen large NRI project is currently in progress leveraging the Vietnamese subsidiary's capabilities. It is the company's largest revenue segment.
2. プライム向け事業: Revenue grew year-over-year, driven by increased projects from long-standing existing clients alongside steady new client acquisition. Profitability improved due to a higher share of high-margin projects and high productivity solution delivery.
3. サービス提供事業: Small segment size, but revenue grew 28.6% year-over-year, led by increased demand for Oracle product implementation technical support services.

By business model:

• Digital Business: Slow but steady year-over-year revenue growth, driven by high demand for consulting and advanced AI support services.
• SI Business: Strong market demand, with steady progress in expanding modernization project scale and acquiring new cloud implementation projects.
• Enhance Business: Revenue decreased after a review and exit from low-margin projects.

By end-user industry:

• Financial: Solid demand for securities infrastructure and banking projects; revenue fell year-over-year due to exit from unprofitable projects.
• Distribution, Manufacturing, Public Sector: All grew, with public sector (especially central government agencies) seeing particularly strong performance.
• Transportation, Communication, Other: Failed to exceed prior year revenue as key client projects did not progress as expected.

• Full-year 2026 March fiscal year guidance maintained: Forecast consolidated revenue of 19.5 billion yen (6.3% increase year-over-year), operating profit of 1.75 billion yen (26.7% increase year-over-year), and net income of 1.22 billion yen (3.3% decrease year-over-year; the decrease is due to the absence of last year's one-time gain from retirement benefit system revision).
• Management confirms that meeting the full-year target is currently challenging, as order backlog remains flat year-over-year and distribution/communication/energy sectors have seen lower order intake than last year. The company will focus on expanding business in high-demand public sector, financial, and manufacturing sectors, and securing additional modernization projects to hit the full-year target.
• The company has multiple in-query projects for the automotive and railway industries, and will intensify proposal efforts to convert these projects into firm orders.
• Dividend guidance maintained: Interim dividend of 20 yen per share, planned year-end dividend of 22 yen per share, for a total annual dividend of 42 yen per share. The forecast dividend payout ratio is 51.8%, aligned with the company's 50% target payout ratio for shareholder returns.
• Medium-term financial guidance maintained: 2027 March fiscal year revenue target of 23 billion yen, representing over 1 billion yen annual revenue growth, with the top-line growth rate identified as the key factor for meeting medium-term targets.

• High labor turnover in the IT industry has led to a shortage of mid-level leader talent who can lead business initiatives, which constrains growth capacity.
• Revenue growth has not kept pace with accelerated headcount growth from expanded hiring, leading to declining per-employee sales and operating profit metrics. If improvements do not materialize, overall profitability will be negatively impacted.
• Order intake is below target in multiple key industries (distribution, communication, energy), putting full-year annual performance targets at risk.
• Unprofitable projects have not been fully eliminated, and project risk management capabilities still require further improvement.
• The full-year performance target is ambitious, and significant operational effort is required to achieve it.

Q: What is the basis for the full-year guidance, and how likely is it to be achieved at the current stage?

A: Management confirms the full-year target is an ambitious one, and achievement will require significant effort given that current order backlog is only at prior-year levels. There is strong demand and high inquiry volume for modernization projects across multiple industries, and strong order intake in public sector and financial sectors. The company will focus on arranging sufficient capacity to capture these opportunities, and work to secure large projects to hit the full-year target.

Q: Public sector profit margin dropped sharply this quarter. What caused this, what is the outlook for improvement, and what are the mitigation plans going forward?

A: The margin decline came from a single unprofitable high-difficulty public sector project that required faster delivery and higher quality than typical projects, leading to higher-than-planned labor and coordination costs. This project is expected to be finalized by November, and after completion it will be exited. All other ongoing public sector projects are expected to deliver healthy margins, so after this project is closed, overall public sector profitability will return to normal levels and there will be no ongoing impact to the segment.